Marks and Spencer plc v Customs and Excise

The House considered whether a trader has a directly enforceable Community-law right to zero-rating under Article 28(2)(a) of the Sixth Directive and, if not, whether general principles of Community law including fiscal neutrality and equal treatment permit recovery where national law was mistakenly applied so that zero-rated supplies were taxed at the standard rate.

The Court of Justice of the European Communities answered that Article 28(2)(a) does not create a directly enforceable right to zero-rating, but that where a Member State's domestic legislation maintained under Article 28 is applied inconsistently with Community law the principles of fiscal neutrality and equal treatment do apply and may entitle the trader to recover amounts wrongly charged. A national rule withholding repayment on grounds of unjust enrichment is not incompatible with Community law provided it is applied without discriminating between payment traders and repayment traders; fiscal neutrality precludes applying the prohibition on repayment to payment traders while exempting repayment traders. The national court must carry out a full economic analysis of unjust enrichment and, in principle, order full repayment to remedy a breach of equal treatment unless there is some alternative remedy under national law.

Given the Court of Justice's answers and the Commissioners' acceptance and satisfaction of the disputed teacakes claim, the House allowed the appeal from the Court of Appeal's order.

Background and parties:

• Marks & Spencer plc (M&S) claimed repayment of VAT on (a) chocolate-covered teacakes (argued to be zero-rated as biscuits) for periods between 1973 and 1994 and (b) discounted gift vouchers (early and late vouchers) following uncertainty about the correct national implementation of the Sixth Directive.
• The Commissioners of Customs and Excise resisted repayment in part, relying on section 80(3) of the Value Added Tax Act 1994 (the unjust enrichment or "passing-on" defence) and on retrospective limitation by section 80(4) introduced by the Finance Act 1997.

Procedural history:

• The litigation spanned many years with decisions at first instance (Moses J) and in the Court of Appeal ([2000] STC 16; [2004] STC 1). The House made two references to the Court of Justice under Article 234 (first reference reported at [2003] QB 866) and, after further hearings, a second reference posing five questions about the application of the Sixth Directive and Community-law principles to these facts.

Nature of the claim and issues:

• M&S sought repayment of VAT wrongly charged on teacakes and vouchers. The issues framed for the Court of Justice were whether Article 28(2)(a) conferred a directly enforceable right to zero-rating; whether general principles (including fiscal neutrality) applied where domestic law was mistakenly applied; whether the unjust enrichment defence could be applied consistently with equal treatment between payment traders and repayment traders; whether proof of financial loss affected the outcome; and what remedies Community law required or permitted if discrimination was found.

Court reasoning and outcome:

• The Court of Justice answered that Article 28(2)(a) does not impose an obligation to zero-rate; zero-rating is a permitted derogation. However, maintenance of domestic zero-rating must be "in accordance with Community law", and therefore the principles of fiscal neutrality and equal treatment apply where domestic measures have been applied incompatibly with Community law.
• The Court held that a national rule refusing repayment on the ground of unjust enrichment is in principle compatible with Community law, but such a rule must not discriminate between payment traders and repayment traders. The existence and extent of any unjust enrichment require a full economic analysis by the national court. Where discrimination has occurred, the national court should, in principle, order full repayment unless there is some alternative remedy under national law.
• On the facts of this litigation the Commissioners accepted that the principle applied and ultimately satisfied the disputed teacakes claim, so the House allowed the appeal from the Court of Appeal and invited submissions on costs.

Appeal allowed. The Court of Justice held that Article 28(2)(a) of the Sixth Directive does not give a directly enforceable right to zero-rating but that general principles of Community law, including fiscal neutrality and equal treatment, apply where domestic legislation maintained under Article 28 is applied inconsistently with Community law. A national prohibition on repayment to avoid unjust enrichment is not automatically incompatible with Community law but must be applied without discriminating between payment traders and repayment traders; the national court must undertake a full economic analysis and, where discrimination is established, in principle order full repayment. Because the Commissioners had satisfied the disputed claim, the House allowed the appeal from the Court of Appeal's order and directed submissions on costs.

First instance: Moses J ([1999] STC 205). Court of Appeal decisions: [2000] STC 16 (first Court of Appeal) and [2004] STC 1 (differently constituted Court of Appeal). Earlier reference to the Court of Justice: Case C-62/00 ([2003] QB 866). This House made a second reference to the Court of Justice (order of 12 July 2006; five questions reported at [2008] STC 1408). The Court of Justice gave its judgment on 10 April 2008, after which the House disposed of the appeal by allowing it and inviting submissions on costs (House judgment [2009] UKHL 8).